Investors worry the market rally has gone too far and that talk of recovery is, well, just talk. These broker firm strategists say to put those fears to rest.
Who’s Talking: Liz Ann Sonders, Chief Investment Strategist, Charles Schwab
The Gist: The question is no longer will the global economy revive; it’s whether the revival will last, and the answer is yes.
Though consumers are still winding down their debt and the unemployment situation looks “murky at best,” there are still reasons to be positive about the market and the economy, says Sonders.
First, the housing market, largely to blame for sparking the financial crisis, is beginning to stabilize. The S&P/Case-Shiller Home Price Index showed home prices rising month-over-month for the second consecutive month in June, and new home sales jumped 9.6% during the same month, partly because of the government’s ,000 tax credit for first-time home buyers. And though there are still a lot of foreclosures to contend with, consumers will gradually start to gain confidence as they see the values of their homes stabilize, which could lead them to spend more.
Increasing consumer confidence could be a pleasant surprise for the market in the months ahead, since expectations are particularly low for the holiday shopping season following a tough back-to-school spending season says Sonders. The outlook on business spending is also dreary, despite the fact that the ISM Manufacturing Index had its best results since June 2007 and showed signs of expansion. But with factory inventories remain historically low, even a small boost in demand would lead to a boost in production, she says. Strength in auto, housing, inventories, trade and government spending could also boost gross domestic product, even without strong consumer spending.
President Obama’s reappointment of Ben Bernanke as chairman of the Federal Reserve also eliminates some of the uncertainty lingering in the market, says Sonders. However, the Fed will still have to manage its monetary policy “delicately” and in good time. The balance between stimulating the economy and fighting the looming threat of inflation will be tricky, says Sonders.
So what should investors do with this “constructive” recovery period? There is still a lot of investor cash on the sidelines, says Sonders, and many investors still need to increase the equity investments in their portfolios. Other investors who got “a bit overzealous” in the recent rally should take some profits since a near-term pullback seems likely, she says.
Who’s Talking: David Bianco, Chief U.S. Equity Strategist, Bank of America-Merrill Lynch
The Gist: The recent market rally was modest by historical standards. In the early stages of economic recovery, it should continue.
The S&P 500 is up a 50% from its March lows, a jump not seen since the Depression-era. But simply because the market rose dramatically doesn’t mean investors should be waiting for a pullback before investing more in equities, says Bianco. Why? Because the rally wasn’t unusual considering how far the market fell before the rally and is fairly typical by historical standards. In a typical recovery, says Bianco, 50% of the last market peak is recovered in the first six months after the market bottom. The remaining 50% recovers over the next 14 months.
Bianco admits that some analysts say this isn’t a typical recovery. Compared with most recoveries, these analysts say, the credit bubble in this one inflated the market by 30% at its highest levels. But even if that’s the case, Bianco says it would still leave 25% more room for the market to go up over the next 14 months.
Some analysts also suggest that the best time to invest in stocks is six months before the market hits bottom, says Bianco. Clearly that point has passed. But the six-month mark after the market’s lows (which, in this case, occurred in March) is actually the better time to jump back in, he says, since investors can be more confident that the market has hit bottom and that the economy is on the path of stable recovery.
It’s also unwise for investors to predict a market pullback based on “seasonality,” says Bianco. Granted, the months of September and October do typically have the worst average monthly market returns, but they have also offered some of the best monthly returns in market history, he says. They are simply volatile months because they represent the “make-or-break time of year for many businesses,” he says.
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